from Persistent to Consistent

Timeframes, levels and trends

I’ve really struggled, as a novice trader, to make sense of timeframes… Believe me when I say I’ve read a lot of books on trading and have yet to find a really coherent explanation of how to use timeframes or an explanation of the value/weighting to ascribe to levels and trends across multiple timeframes.

Maybe it’s because this is something that requires dynamic explanation which is of course a little difficult to get across in a book! Anyway, I’m going to make an attempt at describing how I use timeframes and especially how different levels and trends in different timeframes influence my trading decisions.

After I’ve had a really strong cup of coffee 😉

In this example I’m talking about a trend following strategy on long bets because with a few exceptions most trades I’m looking to get into are on the long side.

Relative weight between levels and trends

At all timescales it seems that levels of possible support and resistance have more ‘weight’ or significance than trends lines. A daily level in gold has more significance than a daily trend… In other words the up trend might get broken temporarily but if the price falls back to a significant level it’s less likely to drop below this point.

From a psychological/market perspective this is simply illustrated by thinking of supply and demand or perceived value.

If the price is trending up it will surely get to a point where people think it’s rising too fast and in the short term their motivation is to sell, or at least not to buy. In their mind the price is perceived as ‘overextended’, ‘expensive’ or likely to fall to a relatively ‘cheap’ level if they hold on long enough… Once the majority of players feel this way the price will inevitably stop rising.

The upwards movement will cease and only when the price drops down to a point (level) that’s nowrelatively cheap to the previous price (which was formerly rising) will the buyers come back in force. The return of buyers is motivated in part by fear of losing out as the price continues to climb. Trends at shorter timeframes (15 minutes for example) are much more likely to be disrupted by news events as there’s an immediate knee jerk reaction which might well be part of the price and included in everyone’s thinking about the ‘value’ of a currency or commodity 4 hours later.

When a price drops back to a level, especially if it’s held for a significant number of days, then there’s an even greater incentive for buyers ‘en mass’ to all reach the same conclusion. The price is back at ‘x value’ which is relatively cheap and it rose to ‘y value’ from here over the last few days. Assuming the commodity or whatever returns to it’s original value (which you remember was trending up previously) then it’s a good bet with a high probability of success.

Now I know that on a daily timeframe crude is going up but it’s also really clear that recently whenever the price gets down to 11,111 the ‘market’ perceives this to be good value. Now, the fluctuations on crude are very large and I don’t have the account size where I’m comfortable taking punts on this as the next realistic level is down at 10,575 and a 500+ point stop makes this a completely un-necessary risk for me personally.

It is however a good example of levels being more important than trends. If I’d have been attempting to follow the crude price based on trend lines I’d have been knackered several times over the last week. My experiences have shown me that intra-day trends are quite a risky proposition to trade off of. However, prices hitting a previously established level and then bouncing off that level during the day (in an upwardly trending market) are good bets.

Relative weight between timescales

So here’s how this works out. Higher on the list = more significance

1. Daily level

2. Daily trend – market direction – must be obvious, right?!

3. 4 hour level

4. 4 hour trend – It’s got to be really working for me to pay attention to these

5. 15 minute level

6. 15 minute trend – I try to ignore these.

So clearly where these values intersect i.e. you’re looking at a 15 minute chart but you’re also about to get to a massive 4hr/daily level it’s highly probable that the level will remain in place as support and you can feel confident in taking the position. I also don’t use moving averages on my charts anymore and frankly feel all the better for it. In the 75 or so minutes it’s taken me to write this up crude is back up to 11,185 so I could probably move my stop to entry and go do something else 😉

To ram the point home further… Where a 15 minute level has held over multiple days it’s very worth paying attention to and also becomes a 4hr and daily level because it’s held on and on.

The longer something remains in play the more significance it has and therefore the ‘easier’ it is to predict and trade off of successfully. It’s interesting to look at how many days or what time period the level has to exist before you begin paying attention to opportunities that might arise so I’d suggest the minimum is 2 occurrences. The example I’ve used is occurrence number 5 but as I mentioned earlier crude is out of my risk range at the moment. Oh well 😉

When I come up with a more coherent exit strategy than the finger in the air method that I’m currently using for this type of trade then I’ll post it here under ‘comments’

I guess there’s also a ‘counter-trend’ strategy available here for shorts on up-trends that bounce off new highs and fail to break through immediately. One advantage of this would probably be the potential to use tight stops once the retracement is confirmed but I’m attempting to keep it simple at the moment!